An Analysis of What Constitutes Royalty Income for Treaty Purposes: A Survey of the Origin and Evolution of the OECD Model Tax Convention’s Royalty Provision

• Jurisdiction: South Africa
• Pages: 203-228
• Author: Johannes Barend Greyling
• Published date: 16 August 2019
• Date: 16 August 2019

203

AN ANALYSIS OF WHAT CONSTITUTES

ROYALTY INCOME FOR TREATY PURPOSES:

A SURVEY OF THE ORIGIN AND EVOLUTION

OF THE OECD MODEL TAX CONVENTION’S

ROYALTY PROVISION

Johannes Barend Greyling

BComm LLB MComm (Taxation)

Ellané van Wyk

CA(SA) MAcc (Taxation)

Senior Lecturer (Taxation), Stellenbosch University

1 Introduction

One of the primar y reasons for the occur rence of double taxation is the

fact that not all countr ies follow the same premise in the man ner in which

they tax their citi zens or residents. Some countr ies levy tax on their citi zens’

or residents’ worldwide income and gains, whereas ot her countries impos e

tax only on income source d in that countr y (hereafter refer red to as “State”).

There are also States t hat apply a combination of the above approaches.

As a result of these different ba ses of taxation, taxpayers who engage i n

cross-border tra nsactions are often subjec ted to double taxation1 in some

form or another. This double taxat ion has led to a proliferation of agreements

between States in a n attempt to prevent or reduce jur idical double tax as an

inhibiting fact or to economic activity. Such agreements a re also referred to

as treaties, Double Tax Conventions (“DTCs”) or Model Tax Conventions

(“MTCs”). Treaties were published by the members (countries or States)

of international organ isations in order to att ain a degree of standa rdisation

regarding t heir contents.2

The main pur pose of these treaties has been the avoidance of double tax ation

since the inception of the rst DTC concluded between Prussia and Saxony in

1869. 3 This pur pose is echoed by the original MTC intro duced by The League

of Nations in 19284 (“Geneva Model”) which was designed to prevent double

taxation in the sphere of di rect impersonal or per sonal taxes of contracti ng

parties, be they n ationals or otherwise.5

1 L Olivier & M Honiba ll International Tax: A So uth African Perspect ive 5 ed (2011) 246 where juridical

double taxatio n is described as i nstances whe re comparable ta xes are imposed on t he same subject, in t he

hands of the sam e taxpayer in two or mor e countries dur ing the same tax p eriod

2 268

3 K Holmes Intern ational Tax Policy an d Double Tax Treaties: An Int roduction t o Principles an d

Application (2007) 56

4 League of Nation s Double Taxati on and Tax Evasion Re port presented by Gen eral Meeti ng of Governmen t

Experts on D ouble Tax and Tax Evasion (1928) (“Geneva Model”)

5 See Art 1 of the G eneva Model

(2013) 24 Stell LR 203

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Since the Geneva Model, numerous MTCs have been d rafted by differe nt

international organisations in an attempt t o clarify, standard ise and conr m

the  scal pos ition of ta xpayer s who are i nvolved in cros s-bord er tra nsact ions.6

The most respected a nd widely used Model is the Organisation for Econom ic

Co-operation and D evelopment Model (“OECD MTC”).7

A factor of ever-increasing import ance in the arena of inter national

taxation is that of inta ngible assets, as highlighte d by a recent report released

by the OECD.8 This report, which i nvestigated the creation of value from

intellectual asse ts, pointed out that these assets have become strategic fac tors

with rega rd to the creation of value. This is specically evident in the light

of globalisation, the emergence of infor mation technology and the man ner

in which knowledge is created, d isseminated and applied i n the modern age

across international borders.

Further more, uncertai nty often exists regard ing what constitutes a royalty

payment.9 As royalties are often paid across inte rnational borders, it is not

surprisi ng to learn that the issue r egarding the inter national taxation of such

royalties is specically addr essed in virtually all moder n MTCs.

In light of this ever-increasing impor tance of intangible asset s, as well

as some uncer tainty regarding its d enition, the purpose of t his article

is to elucidate the use of the term “ royalties” in MTCs when paid across

international b orders. The article wil l consider the development of the term,

as used in the most prevalent cu rrent MTC, the OECD MTC. In so doing,

it will investigate the treaty de nition of the term “royalty” and analyse its

origin and development throug hout the various updates to t he OECD’s MTC.

Before doing this, recent South Af rican case law regarding the denition of a

royalty will be discusse d briey.

A fu rther aspect which will be explored i n signicantly less det ail is the

development of the taxing rights of royalties, which in t erms of the modern

OECD MTC, provides for zero taxation at sourc e.

2 South African case law on t he denition of a royalty

In I TC 1736 10 an amount of $100,000 was paid to a leading golfer,

participating i n a major golf tournament in South A frica and subsequently

taxed in the same cou ntry. This amount was paid to him in r eturn for exploiting

his intellectual p roperty such as h is likeness, biographical mater ial, presence

at promotional events and repeat television usage of his pa rticipation in the

tourna ment.11

6 Olivier & Honiba ll Internation al Tax: A South African Pe rspective 269 where t he publication of dif ferent

MTCs, such as th e League of Nations Model Convention of Mexico (1943) (“Mexico Draft Mod el”) and

the League of Nat ions Model Convention of London (1946) (“London Draft Mo del”) is discussed

7 R McIntyre Mod el Tax Treaties: A Compariso n of the UN and OECD Model s (2003) 4

8 OECD “Creatin g Value from Intellect ual Assets” (2007 ) OECD Policy Brief 1 1 where i ntellectual a ssets

are define d as research an d development, pate nts, softwar e, human resources and new or ganisation al

structures

9 Olivier & Honiba ll Internationa l Tax: A South African Pers pective 363

10 (200 2) 64 SATC 455

11 Olivier & Honi ball Internatio nal Tax: A South African Pe rspective 364

204 STELL LR 2013 1

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